Professional Services Accounting ARTICLE -
Key Financial Issues for You and Your Family
Is There an Employee in Your House?
Target Audience: Law Firm Professionals, Lawyers, Law Firm Associates, Housekeepers
Retirees and avid travelers Oliver and Georgina recently hired a full-time housekeeper to clean, cook and run errands. The couple provided her with a strict daily schedule, stocked up on cleaning supplies and groceries, and settled in to plan their next jaunt. But the couple’s contentment turned to surprise when they mentioned the housekeeper to their financial advisor.
“You need to pay employment taxes,” the advisor said flatly. Georgina begged to differ, pointing out that they don’t pay taxes for their plumber or the teenager who mows their lawn every week. The advisor conceded her point but explained that, because they controlled not only what the housekeeper does, but also how she does it, she’s considered a household employee. And that changes everything.
Following the rules
The advisor further explained that you must pay Social Security and Medicare taxes on any household employee who receives annual cash wages of $1,400 or more. (This is the 2005 amount, which will be adjusted for inflation.) Examples include a caretaker or nurse, child care provider, cleaning person, or any other domestic worker.
The rule doesn’t apply if the worker in question is your spouse, your child under 21, or your parent (with some exceptions) — or is anyone under 18 who doesn’t consider the job his or her principal occupation.
The total payroll tax percentage is 15.3%, split evenly between you and the worker. As employer, you’re required to remit the entire 15.3% to the IRS, either by submitting quarterly payroll tax returns (Form 941) or by attaching Schedule H, Household Employment Taxes, to your Form 1040.
The latter is generally the easier method. You must either withhold the employee’s half from his or her pay or include this amount as additional wages on the worker’s W-2 if you cover the cost.
Handling the details
You’re also responsible for federal unemployment tax (FUTA) if you pay $1,000 or more in any calendar quarter in the current or preceding calendar year. The tax is 6.2% of each household employee’s cash wages up to $7,000 per year. You may also owe state unemployment contributions, but you’re entitled to a FUTA credit for those contributions of up to 5.4% of wages.
In addition, employers of household workers must obtain a federal Employer Identification Number (EIN) and have each employee complete Forms W-4 and I-9, which document their eligibility to work in the United States. Following year end, you must file Form W-2 for each household worker who received more than $1,400 in Social Security and Medicare wages or for whom you withheld federal income tax.
Speaking of which, you need not withhold federal income tax — or, usually, state income tax — unless the worker requests it. In these instances, you must withhold federal income taxes on both cash and noncash wages, except for meals you provide the employee for your convenience, lodging you provide in your home for your convenience and as a condition of employment, and certain reimbursed commuting and parking costs.
Of course, the rules don’t end there. You need to comply with federal and state minimum wage and overtime requirements and, in some states, provide workers’ compensation or disability coverage. There may be other legal, tax, insurance and reporting requirements as well.
Playing it smart
Oliver and Georgina initially felt a little overwhelmed by all of these responsibilities and briefly considered paying their housekeeper “under the table.” Wisely, they listened to their financial advisor, who advised that the risk of penalties, interest and public embarrassment greatly outweighs any time and money they might save.
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